After a historic bout of tariff-driven volatility spurred trend-following systematic funds to sell, commodity trading advisers are once again surfacing as buyers of US stocks.
Commodity trading advisers or CTAs, which typically buy stocks as index prices rise and sell when they decline, are expected to buy US equities — no matter which direction the market moves over the next week and month — according to Goldman Sachs Group Inc.’s trading desk.
“The systematic bid is real and growing,” Goldman traders derivatives sales trading team including Brian Garrett and Lee Coppersmith wrote, adding that buying will only amplify as volatility continues to trend lower.
Their forecast comes amid a tentative rebound in the US stock market after the biggest tariff-related fears didn’t materialize. Algorithmic buying could help stem or even prevent another rout as investors are still contending with recession fears and a constant barrage of changes from the White House.
Over the past few months, CTAs had been sellers of US stocks with their equity exposure dropping to the lowest level in five years amid lingering uncertainty over Donald Trump’s trade policies, according to an estimate by UBS Group AG. This cut-to-the-bone positioning has cleared the path for algorithmic funds to return as buyers.
UBS says CTAs’ equity exposure rose slightly but remains low and is in the 16th percentile of readings going back over the past five years.
Another systematic strategy used by volatility control funds is also expected to increase allocations across US stocks, after their exposure dropped to a multi-year low. Those funds’ buying or selling strategy has inverse relations with realized volatility. With 20-day realized volatility falling to 39 from 52, a level last seen in early April, vol control funds could start buying more aggressively.
“We project substantial reallocation to begin over the course of this week, specifically from Vol Control funds,” Charlie McElligott, cross-asset macro strategist at Nomura Securities International, wrote, adding systematic strategies’ stock exposure is at an “extreme low” historically.
Written by: Natalia Kniazhevich @Bloomberg
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